Edited Transcript of 1504.TW earnings conference call or presentation 15-Nov-22 6:30am GMT

Q3 2023 TECO Electric Machinery Co Ltd Earnings Call Taipei Dec 2, 2022 (Thomson StreetEvents) -- Edited Transcript of TECO Electric Machinery Co Ltd earnings conference call or presentation Tuesday, November 15, 2022 at 6:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * An-bing Liu TECO Electric & Machinery Co., Ltd. - Director of Financial Management Center * Andy Chien TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center * Thomas Fann TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer ================================================================================ Presentation -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [1] -------------------------------------------------------------------------------- Ladies and gentlemen, good afternoon. Welcome to TECO Electric & Machinery 2022 Third Quarter Earnings Conference. I'm Andy Chien, the company's spokesperson. I'm joined by 2 executives. First, President, Thomas Fann. Good afternoon. Secondly, An-bing Liu, Director of Corporate Administration Performance Developing Office. Good afternoon, ladies and gentlemen. In today's meeting, I'll first go over TECO's third quarter results, then President Fann will talk about the performance of our 3 main business groups, and provide a recap of our recent major events. After the presentation, President Fann will host the Q&A session. (Operator Instructions) We will compile the questions and answer them later. The presentation materials have been uploaded to the home page of our website. You may go there and download them now. Let's begin with our third quarter results. First up, financial highlights. Net sales came in at TWD 14.816 billion, up by 12.80% Y-o-Y, mainly thanks to the persistent growth of Green Mechatronic Solutions in North America and Europe as well as that of engineering projects of Intelligence Energy. Gross margin in Q3 reached 22.5%, up by 1.4 percentage points Y-o-Y, mainly due to price increases in motor products and a stronger USD. Operating margin was 8.9%, up by 3.2 percentage points Y-o-Y, thanks to the higher gross margin and effective expense control. EPS in Q3 reached TWD 0.51, up by 0.03 Q-on-Q, but down by 0.24 Y-o-Y, mainly due to the loss of TWD 250 million in financial asset evaluation, which had a negative impact of TWD 0.12 on our EPS. In comparison, during the same period last year, the financial asset evaluation benefit was TWD 310 million, which helped boost the EPS by TWD 0.15. Financial highlights for the first 3 quarters, consolidated revenue in the first 9 months was TWD 43.257 billion, up by 15.4% Y-o-Y due to the reasons stated earlier. Gross margin was 22.5%, down slightly by 0.3 percentage points Y-o-Y. OP margin was 8.7%, up by 1.7 percentage points Y-o-Y. EPS in the first 3 quarters reached TWD 1.16 down by 40.8% or TWD 0.8 Y-o-Y, mainly due to the loss in financial asset evaluation. Next slide. Page 5 here shows the revenue and gross margin trend. In the second half of 2021, gross margin was negatively affected mainly by increased material prices and shipping costs. Since the start of this year, through gradual product price increases and cost control, our gross margin has been increasing gradually since the second quarter, it's been above 22%. Now OP margin. Last year, it was negatively affected by material price hikes. Since Q4 last year with cost control and adjustments of product prices, our OP margin has been well above 8%. In Q2 and Q3 this year, we were at 8.9%. Next, I'll hand over to Thomas Fann, our President, who will talk about the performance of the 3 major business groups. -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [2] -------------------------------------------------------------------------------- Next slide. Thank you. For the 3 major main business groups, Green Mechatronic Solution maintained robust growth with its revenue growing by 13.2% Y-o-Y, thanks to continued revenue growth in North America than Europe. Intelligence Energy posted stronger growth increasing by 50% Y-o-Y on the back of increases in engineering project revenues such as IDC projects. Air and Intelligent Life's revenue slide` by 6.8% Y-o-Y due to a one-off government project in the same period of last year, which resulted in the higher base period. Without the onetime contribution, the group would have posted Y-o-Y growth. Next slide, sales trend of business groups. Green Mechatronic Solution continued its upward trend. Intelligence Energy also grew steadily. As for Air and Intelligent Life, besides home appliance, this group also consists of several subsidiaries. So the range of revenue fluctuation is usually bigger. Meanwhile, from Q3 last year through Q1 this year, the base period was higher on the back of the onetime revenue contribution from the government project. Overall, without the onetime impact, Air and Intelligent Life would have posted steady growth. Next slide, revenue breakdown. Consolidated revenue in the first 3 quarters increased by 15.4% Y-o-Y. In terms of revenue breakdown, Green Mechatronic Solutions stayed at 52.6%, while Intelligence Energy's share increased because of the implementations of more projects this year and the decreased contribution from the one-off government project of Air and Intelligent Life. Therefore, Intelligence Energy came under bigger pressure to grow its revenue share. Next slide. This slide shows clearly that Green electronics solution has maintained steady performance, staying at around 52%. However, Intelligence Energy continued to grow, reaching 19.4% in Q3. Air and Intelligent Life share decreased at 23% in Q3. Next slide. Outlook for the fourth quarter. Despite the headwinds in the global market, we expect Green Mechatronics Solutions revenue to grow by 7% to 11% in Q3 -- Q4 rather, with North America and Europe being the main growth regions. Intelligence Energy is projected to maintain rapid growth, to post 33% to 37% revenue growth. Air and Intelligent Life, due to the high base period, is projected to post revenue decline of 16% to 12% for Q4. However, excluding the impact of the onetime project, the group would see a 4% growth Y-o-Y. Company-wide gross margin is projected to stay healthily at 22% to 26%. Next, we will have a recap of recent major events. At Automation Taipei 2022 in August, we showcased several solutions that we developed in line with the current trends. One of them was the low carbon industry solution. We started to deploy the solution in Taiwan and have achieved initial results that enable our customers to build low-carbon total solutions. Another highlight was the Robotic Arm Joint Module which was a joint module we developed to support various service robots. We also developed Open Smart Transport Platform, which is like a small transformer robot. It is an open platform which can be modified or programmed to meet various application requirements of our customers. For example, when installed with a Robotic Arm Joint Module, it becomes a Cobot. When installed with a detection device, such as a camera, it is a robot with the detection capability. So it is a multifunction and versatile open platform that allows for flexible assembly and adaptation. Moreover, this solution made into the finalist list for the Golden Award of 2022 Taiwan Excellence Awards. Also in the exhibition was the Carbon Assets Management Solution. In addition to a managed platform, we also provide a series of detection devices to help aggregate and manage data, in particular, carbon emissions data for analysis. We've built the platform to help our customers solve the problems they encounter in the management of these assets. So these together underscores the trends we are targeting in the future. Next slide. As you know, TECO has been actively developing wind power business. We have achieved solid results in the onshore substation segment. We are also now expanding into the offshore substation space. Of course, offshore substations are much more technically challenging. The requirements for many parts like GIS switchgear are different from those of the onshore ones because they must be corrosion-resistant and shock resistant. More importantly, we signed a letter of intent with ABB to jointly develop a pre-fitted electric equipment room solution, we call it E-house. E-house is a solution that can be applied to various engineering settings to meet different application requirements. We offer various e-house offerings not just for offshore solutions, it is a modular pre-fitted solution that can be applied to onshore substations, IDCs and other settings. For TECO and ABB, both, it marks a crucial step in the development of offshore wind power. With E-House, we are also hoping to make further breakthroughs in the offshore wind power sector. Next slide, please. I touched upon this earlier, Taiwan Excellence Awards. This year, Teco submitted 12 applications and out of the shelf entries were awarded, including the open smart transport platform, Cobot, I mentioned just now, which met into the finalist for the Golden Award. These achievement shows our R&D and innovation progress. It is also our expectation that we can increase the awareness of our offerings to benefit more customers. Next slide. Moreover, we are making strides in terms of ESG. I'm happy to report to you that in the recently unveiled list of DJSI, TECO scored 78 points, an increase of two points from last year. As you can see, the firms before and after us on the list are very similar in terms of operation and business scope such as Schneider, Legrand, ABB, Havells from India and WEG from Brazil and Fuji from Japan. We are quite similar in terms of our business portfolios, in those are reduction and electromechanical offerings. Here, you can see TECO score is quite high. We hope to make more progress continuously and perform even better next year. Meanwhile, for the ninth year in a row, TECO garnered the Taiwan Corporate Sustainability Awards, TCSA. This year, we received Talent Development Leadership Award, Taiwan Top 100 Sustainable Model Enterprise Award, Social Inclusion Leadership Award and Platinum Award Under Corporate Sustainability Reports Award. This is a rare achievement in the ESG landscape, and we're happy to be able to share with you now. This concludes my presentation. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [1] -------------------------------------------------------------------------------- Thanks, President Thomas Fann. Now we will proceed to the questions-and-answer session. (Operator Instructions) We will combine the questions and answer them together. Thank you. An investor asks, how much benefit does TECO expect to gain from Taipower's resilient power grid initiative, whether the projects that TECO can participate in? What business opportunities will they provide for TECO? President Fann will answer these questions. -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [2] -------------------------------------------------------------------------------- Thank you for the questions. In fact, the resilient power grid initiative serves as a very good opportunity for TECO because we have been working on the entire electric segment. But frankly speaking, the results we have achieved so far are not as good as we expected. The initiative is a bond to TECO from decentralized hardening to preventive engineering requirements of the initiative, we can take part in all of them because we are currently engaged in relevant fields such as high-voltage switch and energy storage, which happened to correspond to the directions that Taipower's company is heading to. And we are also developing and have built relevant products. We hope that from next year, we will have newer products that will align with the resilient grid initiative of Taipower. So that our performance can be further improved. This is a direction that we are currently moving into. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [3] -------------------------------------------------------------------------------- Here's another question from our investors. What is TECO's view on the economic outlook next year? And what is your outlook for Green Mechatronic Solution, Intelligence Energy and Air and Intelligent Life groups? -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [4] -------------------------------------------------------------------------------- Let's look at them one by one. Green Mechatronic Solution comprises two divisions, traditional business such as motors and inverters, and energy saving and carbon reduction related business. In terms of motors and inverters, of course, some regions faced weak market conditions. For example, in Mainland China and in Taiwan due to foreign affairs issues, the impact is being felt more or less. However, North America remains to be quite healthy and robust. Now about the carbon emission-related business, COP27 is taking place in Egypt. When there comes to climate policy, it involves not just a single country but the entire world. Today, in many regions and countries are setting policies. For instance, the U.S. just passed the IRA last quarter.Policies that will benefit the missions reduction solutions regardless of which regions. Demand coming from relevant initiatives would also benefit TECO. So whether in Taiwan or in Mainland China or even in North America or Southeast Asia, as long as they are government policies being developed to provide guidance, there may be benefit to check potentially. For next year, despite a more downbeat outlook, with policy support from various countries, we expect our performance to be on par with this year. especially in terms of Green Mechatronic Solutions. TECO continues to grow our intelligence energy business. We started out from Taiwan and spend into other markets. We expect Intelligence Energy to post significant growth next year as we are set to roll out many projects. Home appliance business will be under greater pressure when the economy is bad, consumers become more cautious about their spending. The situation may become quite clear in Taiwan and China in Q4. We still expect a relatively stable growth in the Intelligent Life group next year, mainly from the commercial AC segment. Because commercial AC also involves HVAC for emissions reduction. Whether it is because of policy support or the demand for refrigeration and AC due to climate change, it will provide important support for Air and Intelligent Life Group. Therefore, Air and Intelligent Life Group is projected to grow steadily next year. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [5] -------------------------------------------------------------------------------- Investors asked, last year, the gross margin -- gross profit was affected by the increase in raw material prices. Specifically, which materials were affected? What are the -- what was the scope of the impact? President Fann, please? -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [6] -------------------------------------------------------------------------------- Okay. The price hikes mostly were imposed on copper and silicon steel, which is the most important material for motors. And of course, aluminum, which is used in many home appliances, especially ACs. These three were the most severely impacted from last year through the first half of this year. From Q3 this year, globally, material prices have begun to fall significantly. So far, the prices have become relatively more stable. Of course, they are not fully back to pre-pandemic levels, but have become down very much from last year and the peak of this year. which will likely have a positive impact on our gross margin in Q4 and next year. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [7] -------------------------------------------------------------------------------- Here's another question. What is the progress of the new India -- the India plant? What is the plant production capacity? President Fann, would you please? -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [8] -------------------------------------------------------------------------------- Our new plant is located in the southern part of India, and we expect to start production in Q1 next year. The production capacity is 50,000 motors, but because we are now preparing to collaborate with some EV factories in India, we may also add EV production capabilities to the plant which is what we are planning now. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [9] -------------------------------------------------------------------------------- Here's another question. Could you provide more details on the ABB partnership and your views on inflation-related impact? -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [10] -------------------------------------------------------------------------------- In terms of the collaboration with ABB, we are engaged for technical cooperation and also serve as a supplier to ABB. We provide components and parts to E-house. Overall, ABB will collaborate with us technically. The collaboration is mutually beneficial, especially when offshore wind farms are moving further offshore. The demand for offshore substations will increase, which will generate big opportunity for Taiwan, and we look forward to expanding our scope of collaboration with ABB. In terms of inflation, the newly unveiled U.S. CPI rose by 7.7%, just slightly from previously. However, it is still very high, but at least it has passed the peak for U.S. As for Europe, CPI last month rose by more than 10%. We are waiting for the latest inflation data from Europe. The impact of rising inflationary pressure will be mainly seen in interest rate decisions of central banks around the world. And of course, we will also have variance on economic conditions. Yesterday, Mainland China announced a series of policies to support the property market. So I think every market may have some of its own policy support measures in one way or another. For next year, we don't see inflation dealing a big impact to us as material prices have peaked and been stabilizing. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [11] -------------------------------------------------------------------------------- Here's another question from investors. The gross margin range you guided for Q4 is higher than Q3. Why is that? Director, An-bing Liu will address this one. -------------------------------------------------------------------------------- An-bing Liu, TECO Electric & Machinery Co., Ltd. - Director of Financial Management Center [12] -------------------------------------------------------------------------------- Green Mechatronic Solution has the lion's share of TECO's revenue. Copper and silicon steel are the two major commodity materials of Green Mechatronic Solutions. Since the second half, the material prices have been showing a gradual decline. From the point of order placement to delivery of the materials, there is a time lag. We projected that in Q4, the unit price of silicon steel will be slightly lower than that in -- so we factored that into the guidance of the Q4 gross margin. We have another question. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [13] -------------------------------------------------------------------------------- How is your e-powertrain shipment go in. Have you achieved the expected goals? Will TECO ship trucks as scheduled in Q4? And what's the projection for this and next year? President Fann, would you please? -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [14] -------------------------------------------------------------------------------- For e-powertrain, we still think we'll have nearly 30% growth this year versus the last, and we should be able to achieve that. We will start shipping e-Trucks in Q4. The initial batch may be trial mass production, but we will start shipping in Q4. Next year, in terms of bus, with the DMIT program in Taiwan, we expect to see solid growth momentum for the sector, which will help our e-bus business to increase slightly. Moreover, e-truck business will also get a slight boost. Of course, we will not confine ourselves in Taiwan and are also targeting other high-potential markets. For example, in India and North America, we are making more efforts in promotions. We also hope that we will make breakthroughs in the emerging markets. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [15] -------------------------------------------------------------------------------- (Operator Instructions) Now we are back with more questions. Investors ask if we can provide details on revenue breakdown by region. Director do you, please? -------------------------------------------------------------------------------- An-bing Liu, TECO Electric & Machinery Co., Ltd. - Director of Financial Management Center [16] -------------------------------------------------------------------------------- According to the figures for the first 3 quarters of this year, 30% of our consolidated revenue came from North America which is our largest revenue area, followed by China and Europe, both close to 20%. And these two tied for the second largest revenue area. Taiwan is about 13%, followed by Southeast Asia, Australia and other regions. So this is a breakdown of revenue by region. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [17] -------------------------------------------------------------------------------- Moreover, there are also questions on whether we can provide more information on e-houses components and functions. President Fann will address this one. -------------------------------------------------------------------------------- Thomas Fann, TECO Electric & Machinery Co., Ltd. - President & Chief Information Security Officer [18] -------------------------------------------------------------------------------- E-House, in fact, is not a brand-new concept. What did I describe it as a concept. Because with different applications and components inside are completely different. Take substations, for example. Onshore substations are fixed structures. After RC construction of the structure, we installed transformers switches and so on in the structure based on the design. So it is a fixed structure in RC structure. E-House, on the other hand, is pre-installed and modularized. For example, we take a 40-foot shipping container and create a good design tailored toward different needs. If it is a substation, there must be a transformer inside along with switches and the variety of breakers. We may design to fit into a 40-foot container which can be hold offshore, for example, and immediately plug and play because it's been tested and verified repeatedly during the pre-fitting phase. It eliminates the needs of testing and verification after its transported offshore for installation. Basically, when it is transported to the desired location and gets connected to the grid, it becomes immediately operational with just a few tries. That's what E-House is about basically. E-House has many use cases. For example, in North America, we are helping oil and gas companies to achieve electrification. We offer different types of E-Houses, including open type, which contains medium voltage or high-voltage inverters and control devices, transformers and large motors to help with natural gas distribution. It's also done on a 40-foot or 20-foot platform, pre-installed with all the required products and control devices. It is mobile, pre-fitted, pretested and becomes immediately operational right after it's transported to an oil and gas station and plugged-in. So it helps a lot of time -- it helps save a lot of time. Customers benefit from not having to perform testing repeatedly on site or reinstall the devices over and over again. To our customers, it is a very convenient solution, which is not only effective but also time saving. E-House may be applied to IDC 2 or data centers, not all data centers or mega data centers. In offshore islands, for example, data centers need to be mobile and nimble. We can install servers and other devices on the 40-foot or 20-foot mobile platform. So modular preinstalled and pretested and Plug and Play ready. That's the basic concept. -------------------------------------------------------------------------------- Andy Chien, TECO Electric & Machinery Co., Ltd. - Director of Corporate Governance Center [19] -------------------------------------------------------------------------------- Since we don't have any more questions online. This concludes the Q&A session. If you have further questions, please contact the IR team at our company. Once again, thank you very much for participating in today's earnings conference. This recording will be made available on our website for hours later. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]